Integrated Reporting (IR) is quite new to many business leaders. It doesn’t have a long history while many people are still confused between integrated reporting and corporate reporting.
Traditionally, corporate reporting was mainly an annual report with financial figures presented to the public by listed companies. Its major readers are shareholders, investing communities and banks. Therefore, corporate reporting focus on financials.
However, there were more and more evidence showing the focus on financial figures only drives for short term financial success but long term benefit may be ignored by the managers. Communication between the company and its stakeholders is not enough.
Integrated reporting was then developed to solve this problem.
What is meant by integrated reporting?
‘Integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term’, says International Integrated Reporting Council (IIRC).
The key of integrated reporting is value creation in short, medium and long term through concise communication covering both financial and non-financial information.
It is an evolution of traditional corporate reporting by focusing on conciseness, strategic relevance and future orientation.
Integrated reporting has been created to enhance accountability, stewardship and trust as well as to harness the information flow and transparency of business that technology has brought to the modern world.
Therefore, investors are provided information they need to make more effective capital allocation decisions in return of better long term results.
The origin of integrated reporting
Someone would say integrated reporting was erupted after 2008 financial crisis. It is not completely correct.
A report published by Institute of Directors in Southern Africa in 2002 (also known as King II Report) stated the codes for listed companies in South Africa to follow. South African listed companies boards have to balance between financial performance success and the sustainability of the company’s business.
It is considered the first page of integrated reporting development.
In United Kingdom, The Prince’s Accounting for Sustainability (A4S) Project was established by HRH The Prince of Wales in 2004.
The purpose of A4S Project is to inspire finance leaders to drive a fundamental shift towards resilient business models and a sustainable economy.
The milestone for A4S Project is a roundtable hosted by The Prince of Wales in St James’s Palace in 2009. It was just right after 2008 financial crisis caused many financial companies in trouble or even collapsed.
During the roundtable, it was agreed that standard setters, regulators, business and investors from the worlds of finance and sustainability needed to come together to create a new, integrated approach to reporting.
In 2010, A4S, the Global Reporting Initiative and the International Federation of Accountants collaborated to launch International Integrated Reporting Council (IIRC).
IIRC is a global coalition of regulators, investors, companies, standard setters, the accounting profession and NGOs. As described in our first part discussion, it promotes communication about value creation by establishing integrated reporting and thinking within mainstream business practice as the norm in the public and private sectors.
Why is integrated reporting important?
After 2008 financial crisis, it is obvious the corporate reporting with complex and dated reporting methods were no longer satisfied by the companies’ investors and stakeholders. A report helps stakeholders in understanding a corporation financial stability and sustainability becoming more important than ever. It is why IIRC was set up in 2010.
IIRC’s vision is to align capital allocation and corporate behavior to wider goals of financial stability and sustainable development through the cycle of integrated reporting and thinking.
However, IIRC doesn’t propose any ‘format’ or ‘template’ for integrated reporting. In International IR framework, it includes principles-based guidance and content elements to govern and explain the information within an integrated report.
This principle-based framework enables each company to set out its own report rather than adopting a checklist approach. It makes sense for different companies to communicate with their stakeholders on how they create value in different ways instead following the same set of rules and standards as in IFRS.
In addition, integrated report does not replace any corporate report that is currently prepared. It consists of both financial and non-financial information that are valuable to the readers to understand what are the current risks of the company exposes. Also, it explains the corporation’s strategy and resource allocation on future development.
International <IR> Framework
The purpose of this Framework is to establish Guiding Principles and Content Elements that govern the overall content of an integrated report, and to explain the fundamental concepts that underpin them.
Guiding Principles underpin the preparation of an integrated report, informing the content of the report and how information is presented. There are seven principles listed in International <IR> Framework –
Strategic focus and future orientation
Connectivity of information
Stakeholder relationships
Materiality
Conciseness
Reliability and completeness
Consistency and comparability
Regarding to what should be included in integrated report, IIRC suggests eight Content Elements that are fundamentally linked to each other and are not mutually exclusive –
Organizational overview and external environment
Governance
Business model
Risks and opportunities
Strategy and resource allocation
Performance
Outlook
Basis of preparation and presentation
Through the framework principles and elements, information included in integrated report can help to assess a private sector, for-profit company ability to create value. However, it can also be applied by public sector and not-for-profit organizations in some cases.
What are six capitals?
The word ‘capitals’ is seen in the framework very often. Here I would like to talk about what does capital mean and its role in the framework.
IIRC defines capitals as below –
The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of the organization. They are categorized as financial, manufactured, intellectual, human, social and relationship, and natural capital (or six capitals).
The capital concept here is a ‘flow’ concept while an organization’s financial capital is increased when it makes profit, human capital increased by training but the related training costs reduce its financial capital.
The six capitals mean six categories which are –
Financial capital includes financing obtained from equity, debt or operations;
Manufactured capital includes buildings, equipment and infrastructure;
Intellectual capital includes intellectual property, systems, knowledge and protocols;
Human capital includes people’s competencies, capabilities and experience, their motivations to innovate;
Social and relationship capital includes the relationships with communities, stakeholders, shared norms and common values and behaviors;
Natural capital includes all renewable and non-renewable environmental resources such as clean air, water, land, minerals and forests.
Remember that IIRC doesn’t require all integrated report following the categories it suggests. It helps corporations to consider all forms of capital and the concept of value creation.
Adoption of integrated reporting by big companies
A survey of FTSE 100 annual reports was published in ACCA Accounting and Business magazine in July 2017 finding that many companies were still simply ‘ticking the boxes’ when selecting information for their annual reports. Integrated reporting is still not well implemented.
In the survey, the trends of companies providing an investment proposition that sets out strengths and opportunities and using business models to articulate their value-creation process is up from 10% in 2014 to 30% in 2017 survey.
However, it is still disappointing.
Many reports fail to tell a chronological story, or in particular, very few of them (only 7%) could provide a roadmap to explain how the companies proactively respond to market drivers and how these determine their current and future strategy.
But some progress are seen, for example, 60% of companies focus on wider purpose by covering value creation for stakeholders and align with their corporate value and culture.
In addition, some companies are starting to respond to developments in the corporate reporting debate.
Even the findings in survey are not very encouraging, the author is still confident in integrated reporting –
We are optimistic that we will see incremental progress as compares start to feel the pressure from regulators and other stakeholders in this debate.
ACCA SBL pass paper question illustration
Integrated reporting is a popular topic in SBL exam. I find it has already appeared twice since September 2018.
The following question is from Question 2a in December 2018 –
It asks the roles and benefits of integrated reporting in communication and building relationships with stakeholders. However, as pointed out in the Examiner’s Report, many students did show weak understanding of integrated reporting by only describing six capitals.
In our previous discussion, integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.
Therefore, students who could recognize integrated reporting could add value to a wide range of stakeholders and identified HiLite’s key stakeholders who would be benefited would achieve high marks here.
Conclusion
After reading this article, I hope you understand the meaning of integrated reporting and it is an important communication tool between managers and stakeholders about company’s financial stability and sustainability.
Value creation is a key concept while the six capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of the organization.
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